Advisers not very confident on their annuity know-how

Morningstar research shows that advisers prefer systematic withdrawals in retirement

Oct 19, 2012 @ 3:34 pm

By Darla Mercado

Despite their clients' interest in guaranteed income, many advisers still hesitate to recommend annuities.

Much of that uncertainty appears to be tied to lack of understanding and experience with the insurance products, according to research from Morningstar Inc. The firm polled 106 advisers from a variety of backgrounds, including independent broker-dealers, registered investment advisory practices and wirehouses.

Participants graded a trio of retirement income distribution methods: systematic withdrawals, insurance-based solutions or a “bucket” approach, in which some money is set aside for income and other assets are invested for growth, depending on the time horizon.

Of the three approaches, advisers preferred using the systematic-withdrawal approach. Buckets were second and insured products were third.

Economic climate aside, advisers like the idea of clients' living on a percentage of assets because it's the simplest concept to explain, according to John McCarthy, director of insurance solutions at Morningstar.

At the same time, surveyed advisers also find systematic withdrawals to be the least theoretically sound of the three concepts, likely due to the fact that today's stock market volatility and stagnant interest rates have caused many to reconsider that method, he added.

The buckets approach ranked first for being theoretically sound, followed by insurance-based solutions.

Respondents take issue with the buckets approach, finding it complicated to implement, but still they seem to prefer that to trying to understand annuities.

“Insurance may have some traction as being a decent idea, but the reps don't understand it as well, and as a result, their clients might not understand it well, either,” Mr. McCarthy said. “As soon as you get into the income floor and insurance products, you throw in an element of complexity.”

Indeed, that skepticism of annuities was reflected in the survey when nearly 6 in 10 advisers said they “never” recommend longevity insurance — or a deferred income annuity — to their clients. That's likely tied to the fact that longevity insurance is a fairly new product and hasn't had time to gain a following, Mr. McCarthy said.

While advisers are aware that they have an income distribution problem to solve, many still have a problem understanding the solutions available.

Eighty-one percent of the participants said that they are “very concerned” or “somewhat concerned” about their clients' ability to sustain a comfortable level of income. However, only 62.4% feel that they have a “thorough” understanding of the different retirement income solutions; fully 37.7% either understand the products “somewhat” or have a “limited” comprehension of how they work.

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